Interesting post on GTR BB along your lines.
posted:
Thursday, March 09, 2000 11:49:10 PM -- read 212
times, 13 replies
author:
Gregory Spear <info@spearreport.com>
subject:
G* -Globalstar-GSTRF Summary
First, the mandatory disclosure. I am a newsletter editor and money
manager and I and many of my clients are long G*. The following
article is an attempt to summarize the Merrill Lynch debacle for our
readers, and because some of the ideas came from this board, I
thought I'd share the article with you all, for what it may be worth.
Thank you all for a great discussion.
Globalstar Update (to be published 3/9/00 in The Spear Report)
In researching the allegations made this week by Merrill Lynch
analyst Tom Watt regarding a possible ?liquidity problem? later this
year for Globalstar, I am indebted to several authors on the Gilder
bulletin board, among other sources, for some of the concepts and
numbers used below. Without their permissions, which I have not
sought, I won?t cite their names, but if you have subscribed to
Gilder?s, you can find the original works on the www.gildertech.com
bulletin board at this time. These Gilder bulletin board discussions
are extremely useful and I again recommend that you subscribe to
Gilder?s newsletter at www.gildertech.com. Please note that all
bulletin boards are subject to abuse and manipulation by users, so
use due diligence and always check the alleged ?facts? before
investing on the basis of bulletin board posts.
Ok, here?s the skinny.
The Globalstar roll-out of its satellite-based digital, CDMA telephone
service is barely six weeks old. Some 41 countries are now
serviceable and 27-32 more are planned before year-end. 48
Satellites are in place, the entire planned constellation, including
four ?spares? recently launched. All reports are that the quality of the
service is as good as digital mobile phones and close to a
land-based system. The cost of the handsets, originally $1500, is
expected by the company to drop to $400 by April 1. Every major
telecom in the world is signed up as a distributor. Data and Internet
capability will be built into the service by year-end using Qualcomm
technology, demonstrated successfully last week.
The Merrill report said that Globalstar will have only 200,000
subscribers at year-end, not enough to meet the company?s debt
obligations and operating expenses, causing a potential liquidity
crisis.
There are several very negative and faulty assumptions being made
here. First is the 200k figure itself. On March 8, the day after Merrill?s
negative report, we found on First Call a 43 page satellite research
report released just that day by C.E. Unterberg, Towin (CEUT). This
report estimated that Globalstar will have 350k subscribers at
year-end, a 75% increase over Merrill?s estimate!
This would have a dramatic effect on the projected deficit. But both
analysts are way under Globalstar?s own expectation, reiterated on
March 8, of 500,000 subscribers by year end, although the company
admits that for the next several months, the actual ?pick-up rate? will
be unknown because of the complexities of the roll-out to so many
service providers in so many countries. It is interesting that the
roll-out of Globalstar?s service is only about six weeks old, and most
of the countries that are serviceable have gone on-line only in the
last three weeks, but Merrill Lynch believes it has enough data to
conclude that there is effectively no market for this product. Dozens
of major telecom?s, who, we may assume, know their markets pretty
well, apparently disagree; as they are spending or planning to spend
millions of dollars to promote the service!
Those of you who have heard me speak about the Consensus
system, or seen the video (now available through our office), are
familiar with the statistic that 95% of Wall Street analysts are wrong
in their 5-year earnings estimates by 25% or more, and that these
estimates generally err on the conservative side, extremely so for
high-growth companies. To the extent that analysts making one-year
estimates do original research instead of just calling the company,
the error rate for one-year estimates is similar. I won?t repeat the
reasons here, but suffice it to say that of the two analyst estimates
we have, the Merrill estimate is the one to be most suspect of, given
this general trend.
This error by Merrill, if indeed it is one, is perfectly in line with our
general analysis of the Street?s inability to deal with new economy
companies because of the analysts? application of old economy
valuation models and growth formulas. These models and formulas
just don?t work on economy-changing paradigms like broadband
communications.
The second assumption in the Merrill report is that when credit lines
expire for Globalstar, starting in June of this year, and more next
year, there will not be new investment money ready-and-willing to
step up to the plate. But both Loral and Qualcomm are major
investors and are not likely to allow what was a highly speculative
investment in a great idea to expire worthless when it is nearing
profitability! (If you build it, they will come.) The one credit line set to
expire in June is being renegotiated next week. There is presently
no draw on that line (no actual debt). The company?s debt on other
lines is about $650 million dollars, $250 mm of that guaranteed by
the partners and the remaining $400 mm guaranteed by Loral.
Even with 350k subscribers at year-end, Globalstar will admittedly
not be meeting its expenses, including interest on its debt. But
CEUT?s projection for year two of the rollout, 2001, is for 1.04 million
subscribers! Assuming the very pessimistic Merrill estimate of 120
minutes per subscriber for year 2000, and making the extremely
pessimistic assumption that reduced rates will not cause a dramatic
increase in this usage level in 2001, then I calculate that these
subscribers will generate $703 million in revenue. This doesn?t count
other revenue streams for Globalstar, like equipment sales.
Globalstar?s annual debt interest and operating expenses total
approximately $500 million, which would make Globalstar profitable,
big-time, in year two of operation; again, with these extremely
negative assumptions!
Tom Watt?s logic in his projections of liquidity problems for
Globalstar would thus appear to be faulty on the simple basis of
subscriber projections. It is probably also wrong on usage levels and
it appears also to be faulty in its assumptions of Globalstar?s access
to cash. The company stated after the Merrill Lynch report that the
financial assumptions in the report were simply untrue; that even if
the company had no revenue in 2000 and no revenue in 2001, they
would not need more funds to continue operations.
My money does not expect the company to be profitable as soon as
year two, although the numbers indicate that this could happen. This
would be a pleasant surprise, but certainly not necessary for the
company to be on track to imminent success.
Going further out, the CEUT forecast for 2007 is for 7.5 million
subscriptions! My calculator says this would generate revenue of
over $5 billion per year based on Merrill?s current estimate of billed
minutes per subscriber and the current $.47 per minute rate charged
by Globalstar. While the rate charged will likely go down in that
period, the time usage per subscriber will go up in direct proportion,
so the final revenue figure is probably not too far off.
What about competition? There will be some. While the entry barrier
is high, there are several companies willing to ante up. Companies
building new satellite communications systems with possible
telephone capacity include: GMH (Hughes), Echostar (DISH), and
Gilat (GILTF). This tells me a great deal. The companies that would
like to compete with Globalstar, and that are willing to invest some
very considerable sums of money to do so, are probably not so
stupid as to pile into a technology that won?t generate enough
demand for even one company to become profitable. Competition
is a very good problem for Globalstar to have, because it validates
the market analysis of the company and says to investors that
Globalstar is the game to beat. Only one company is even close to
operational; a small southeast Asian group with a single
geo-synchronous satellite, no back-up ability, and not a single call
yet made. Globalstar estimates that this service will not be fully
operational for a year.
By the way, none of these competitors are using the superior CDMA
technology that has made Globalstar?s service so successful, and
none of them will have phone service available for a long time.
All that aside, while my money remains in Globalstar, and I will be
adding more shares at these depressed prices, I must repeat my
warning that Globalstar is a very unusual investment for us, because
the company?s business model is not yet proven in the marketplace
and the company is not yet profitable. Do not overweight your
investment, and if you are worried, then do not add to your
investment at this level. Increasing your investment at this level is for
aggressive investors who understand the risk and for whom
Globalstar is but a small part of a well-diversified (by company)
portfolio.
Possible near-term risks include a renegotiation of a credit line in
the next week or two and the fact that no numbers are now available
on sales, and won?t be for another few months, so rumor or partial
reports could continue to move the market in this stock substantially.
Gregory Spear
www.spearreport.com, info@spearreport.com
GTR BB is much better now.
Jack |
